The UK’s options for importing sugar after Brexit
Just before the UK was gripped by coronavirus, the government outlined its plans for agriculture in a post-Brexit environment. The proposed bill represented a shift from the direct payments to farmers outlined in the EU’s CAP to a new payment system centred on decarbonising British farming. Below we analyse how this could affect the UK’s sugar industry and what it means for how and where from we will import sugar after Brexit.
What are the government’s plans for agriculture post-Brexit?
Through the proposed bill, the government is looking to move away from direct payments to farmers that are based on the amount of agricultural land they manage. This system was introduced by the European Union (EU) as the Common Agricultural Policy (CAP). In the years that followed, the CAP increased land prices while benefitting larger farmers, with unproductive land still being farmed rather than set aside for wildlife habitat.
The UK’s proposed bill aims to monetarily incentivise the decarbonisation of farming. This will be achieved by paying farmers and ‘land managers’ for public produce that they provide. Included in these payments are higher animal welfare, clean air, improved soils, clean water, wildlife habitats, heritage sites and engagement with the environment, amongst other criteria.
Soil protection is one of the main priorities and farmers will be rewarded for improving quality using crop rotation and organic farming. Ministers are also looking to further regulate the use of soil fertilisers. Larger farmers such as sugar beet farms are likely to have fewer opportunities to adapt to the proposals than smaller, more agile farmers. Any new payment system will likely be phased in over a seven year period. For the duration of the current parliament, subsidies to farmers will be paid at the current EU rate, which totals around £3 billion per annum to farmers.
How could this impact the UK’s sugar industry?
British Sugar, the UK’s only beet white sugar refiner, can produce up to 1.5 million tonnes of sugar (1.18 million tonnes in 19/20) from home grown beet, almost all of which is consumed within the UK. It could produce more if farmers were willing to grow more beets over other profitable crops such as wheat and barley, which are predominately used for the bread and the brewing industry. Beet sugar however, is an important rotational crop as wheat depletes the soil of much of its nutrients.
There are around 3,000 sugar beet farmers, mainly situated in the east of England and around 9,500 people involved around the growing and production of sugar from beet. The land in this part of the country is ideally suited to growing beets and British Sugar has one of the lowest costs of production within Europe. Yields per acre are also higher than that of cane sugar growers, but crucially, and unlike cane, the beets need to be grown no more than 60 miles away from a refinery to remain profitable.
However, since the abolition of the EU sugar production quotas in 2017, beet farmers are now paid around £19-21 per tonne compared with £30/t pre-reform. Aphid insecticide containing neonicotinoids were also banned in 2018, not only increasing the cost of production but reducing beet yields. As a result, beet farmers are diversifying to grow other cash crops.
Growing sugar beet requires heavy farm machinery, with extracting sugar also being quite an intensive conversion process. With the cost of growing and producing sugar beet rising, coupled with the potential for lower yields, beet farmers are facing challenging times ahead while adapting to the proposed new agricultural policy.
Could sugar cane fill the gap left by farmers turning away from beet?
Previously, over half of the UK’s supply of sugar came from sugar cane. This was mainly refined from raw cane at Tate & Lyle’s refinery in Silvertown, London. With a production capacity around 1.2 million tonnes, this remains the single largest refinery in Europe.
Currently, however, production only reaches around only half a million tonnes a year. This is because the raw cane sugar it relies on is purchased at a 15% premium to the world market price, accounting for 60 to 80% of production costs. Subsequently, the refinery is producing sugar at a loss.
Tate & Lyle were, therefore, critics of the EU sugar regime as they saw it was protectionist of European agricultural policies and gave preferred treatment to the European sugar beet industry.
How could Brexit affect the make up of the UK’s sugar supply?
Brexit allows the UK government to change our country’s sugar policy in favour of a 50:50 supply of both beet and cane sugar. In 2019 the government stated that 87% of UK imports would not attract tariffs upon leaving the EU’s single market and customs union. Many of the UK’s agricultural sectors, therefore, have concerns that they will have to compete with cheaper global imports as the government has not committed to protecting British farmers.
Talks with both the EU and US are already underway but have been stalled by coronavirus lockdowns. The Commonwealth, a loose-knit organisation of countries that were formerly part of Britain’s empire, also contains several key nations from which the UK could import sugar. The UK currently imports around 600,000 tonnes of sugar annually. Compare this with 1973, before the UK joined the European Common Market, when the UK imported 2.1 million tonnes of raw cane sugar, half a million tonnes of which came from Australia. Currently Australia’s EU quota is just 9,925 tonnes, but Australia is the third largest exporter of raw sugar to the world market!
Formal talks with Australia to negotiate a Free Trade Agreement are about to commence. Other Commonwealth member countries, such as India, the world’s second largest global sugar producer, and the Caribbean who employ half a million people in the sugar industry, will be watching closely as much is at stake with regards to the supply of sugar to the UK.
The countries that could emerge as ideal post-Brexit sugar import partners
Several fast-growing emerging economies across the globe are centred on sugar cane production. Commonwealth member nations, for example, employ twice as many people in the sugar industry than all of Europe combined. These nations, therefore, seem poised to help the UK achieve a possible shift towards a 50:50 supply of cane and beet sugar.
Currently, France supplies up to half a million tonnes of beet sugar to the UK. If the free movement of goods with the EU ends, the same volume of sugar could be supplied by cane sugar producing countries, 25 of which are Commonwealth member nations. Currently, 11 of these countries export up to 2.7 million tonnes of duty free sugar into Europe, as per the terms of the Economic Partnership Agreement. Crucially, however, this is only the case if the sugar is economically priced.
The 1951 Commonwealth Sugar Agreement lowered duties on raw sugar exported to the UK from Australia, East Africa, Fiji, Mauritius, South Africa and the Caribbean.
When the UK joined the European Union this agreement was ‘Europeanised’ into the 1975 Lomé convention to now include the former European colonies that produced raw sugar. This allowed the EU to buy 1.33 million tonnes of raw sugar at a price in excess of the world market price from African, Caribbean and Pacific (ACP) countries. Fiji, Guyana, Mauritius and Swaziland received the biggest percentage of the allocation, with Barbados, Belize, Jamaica, Trinidad and Tobago and St. Kitts and Nevis receiving smaller quotas.
With the creation of the World Trade Organisation (WTO) in 1994, the EU had to allow major sugar producing countries, such as Brazil, currently the world’s largest producer, the opportunity to export to the EU.
In a further blow to the original countries listed in the Lomé convention, the EU denounced the Sugar Protocol in 2007, saying it was not aligned with Europe’s commitments to the WTO.
The Economic Partnership Agreement (EPA) subsequently changed to include the less economically developed (LDC) countries it covered in an everything but arms (EBA) agreement. EPA/EBA agreement still allowed duty free and quota free access to the EU, but importantly no guarantees on price or market share. The new LDC non-Commonwealth countries were keen to expand their sugar industries and this resulted in St. Kitts and Nevis and Trinidad and Tobago closing down their sugar industries.
What is the outlook for the UK’s sugar industry and its post-Brexit import options?
With the EU sugar reforms ending sugar beet production quotas and minimum pricing in October 2017, sugar beet production significantly increased across the trade bloc. Crucially, this reduced domestic prices and substantially lowered the demand for cane sugar from ACP countries. EU sugar beet exports went from 1.1 million tonnes to 3.5 million tonnes, competing on the global market with exports from ACP countries, subsequently forcing them to adapt and develop new regional markets.
The UK government now needs to decide if it wants to open up the UK sugar market to provide support to the countries outlined above. Doing so could offer much needed clarity for the industry’s future for the remainder of 2020 and beyond. Regardless of the decision, the UK’s beet sugar producers look set to face continuing uncertainty, with this only exacerbated by the onset of the global pandemic.